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 / Spring 2003 / Issue 30(originally published by Booz & Company)


What FreshDirect Learned from Dell

Like Dell at its inception, FreshDirect offers a fundamentally different consumer offering. Dell, as an unknown with limited funding for marketing, focused on execution to build its reputation, delivering a high-quality product through a make-to-order process using the same standard components its competitors used, but without the middleman. Dell’s edge in speed created a cost advantage that ultimately redefined the PC industry. Its competitors, saddled with longstanding channel relationships and make-to-stock manufacturing models, have been struggling for years to make the transition to the Dell model, but they still remain short of the system Dell created from scratch.

Scaled to Succeed?
FreshDirect hopes to follow a similar path by focusing on execution in its target New York City market. Its system should offer an immediate competitive advantage given the city’s unique delivery density and especially fragmented competition. Beyond New York City, however, FreshDirect would face different operating economics and formidable competitors, such as Safeway, which has an Internet delivery partnership with the U.K.’s, and Peapod Inc., which is backed by the Netherlands’ Royal Ahold chain. These global supermarket industry giants may prove more adept at transforming their business models than the leaders in the PC industry were during Dell’s early days.

Jason Ackerman says the most poignant lesson to remember from Webvan’s demise is to avoid excessive expansion: “This is a very complex business, and the customer demands perfection every time we fill an order. Webvan’s rapid expansion was unmanageable … no matter how good the executive team.”

The immense market locally available to FreshDirect provides plenty of opportunity for the company without its having to roll out nationally. The greater New York metropolitan area offers a $29 billion consumer grocery market, according to FreshDirect research. Institutional customers, such as corporate meeting planners, caterers, and hotels, purchase another $11 billion worth of these goods annually. In such a large market, FreshDirect’s goal of $500 million in annual revenue for the Long Island facility seems plausible. Its current financial plans forecast positive cash flow from operations by the middle of 2003. Only when this goal is met will management contemplate expansion, they say. The company’s initial priority is to open additional processing facilities (up to three) to serve the same New York City market, with a goal of $2 billion in sales and a 5 percent market share within five years.

Although FreshDirect is seeking a small percentage of a large market, it aspires to volume that is nevertheless well beyond its predecessor’s. Webvan’s original $30 million distribution center in Oakland, Calif., was designed to support 8,000 orders per day and generate $300 million in revenue. Instead, it peaked at a mere 3,200 orders per day and never broke even.

Fortunately, FreshDirect has avoided the ills of unbridled spending that plagued most startups during the height of dot-com mania. Its offices are austere and its staff overhead minimal. Because of the high costs of a prime New York City location coupled with greater vertical integration, FreshDirect has consumed $100 million so far, a large sum, but far below the $1 billion that Webvan blew through during its short existence.

In contrast to Webvan’s high-cost marketing effort, FreshDirect is leveraging billboards, public relations, and word-of-mouth — a so-called guerilla marketing effort. Financed by private investors, including significant funding from the founders themselves, FreshDirect will certainly not spend money like Webvan did. Patient capital and tight purse strings may offer a better formula for survival than a heady capital market and get-quick-rich entrepreneurs.

Ultimately, every investor, patient or not, will seek a strong return on his or her investment. To succeed, FreshDirect must attract and retain a substantial base of regular customers. Even when a company has a superior operating model, the customer remains king.

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